NOTED ECONOMIST URGES ABANDONING STATE TAX SYSTEM

California should abandon its current tax system and charge everyone the same rate.

That’s the proposal made by famed economist Arthur Laffer in a report released Thursday that is highly critical of California’s business climate.

Laffer, former economic adviser to President Ronald Reagan and known for the Laffer Curve on taxation, said in an interview that moving to a flat tax rate of about 6.5 percent would reduce complexity over the tax system and free up money for businesses to invest. He also said the rate would be revenue-neutral at full employment, meaning the state would collect the same revenue as it does under the current system. Otherwise, under our current progressive system Laffer said California is on the way to hollowing out like Detroit.

“California is the best of everything,” Laffer said, “Except for the government, which ruins all the rest of it.”

To be fair, California’s recovering from the recession at a notable pace — housing prices and sales are rising, payroll jobs are up, and in San Diego, the seasonally adjusted unemployment rate is lower than the nation’s for the first time in about five years.

Laffer, who moved to Nashville, Tenn., from Rancho Santa Fe in 2006, penned the “Tax Reform to Fix California’s Economy” chapter in a report called “Rich States, Poor States” by the American Legislative Exchange Council. The Washington, D.C., nonprofit has a slogan of “Limited government. Free markets. Federalism.”

The report ranks California’s economic performance as 43rd out of the 50 states, beating states like New Jersey, Ohio and Michigan. Laffer said California’s rank would improve with a flat tax.

“The California economy would soar and the budget deficit would shrink,” Laffer wrote in the report. “By having the largest possible tax base combined with the lowest possible tax rate, people are provided the least opportunity to avoid paying taxes and the lowest incentive to do so.”

Currently in California, corporations other than financial institutions and banks pay 8.84 percent in corporate taxes. Individuals pay a maximum rate of 13.3 percent on income more than $1 million.

The idea of a flat tax is not new. In 2009, Gov. Arnold Schwarzenegger floated the idea to the Sacramento Bee editorial board at 15 percent of all income. In the 1992 Democratic presidential primary, now-Gov. Jerry Brown proposed a 13 percent flat tax for the United States, which Laffer said he helped develop.

The report’s forward is written by Texas Gov. Rick Perry, a critic of California who is known for recent trips to the Golden State to recruit businesses to Texas, which has no corporate or personal income taxes. The report ranked Texas No. 1 for economic performance, based on state gross domestic product, domestic migration and non-farm payroll employment. Nevada, Utah, Wyoming and North Dakota make up the top five.

Steven Gill, a professor of accountancy at San Diego State University, said moving to a flat tax wouldn’t change the confusion from calculating income and deductions. It does, however, shift the burden to the middle class because by definition the wealthy would pay less, and low-income earners can’t pay much at all. He said a flat tax is actually multiple rates — the tax rate, zero percent, and sometimes even transfers to those who make no money. Gill noted the component of vertical equity in a tax system, which dictates that if you have a greater ability to pay more, then you should.

“If Bill Gates makes another dollar, it means nothing to him. That dollar is almost worthless to him,” Gill said. “The marginal utility of that dollar is substantially greater to someone living on the streets.”

Gill said a good example of a flat tax in America was the 2.9 percent Medicare Tax, but this year the tax rose 0.9 percent for high-income earners under the Affordable Care Act.